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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • AUTO: $0.01 Down Versus $1.00 Up 38 comments
    Mar 16, 2013 3:09 PM | about stocks: AUTO

    AutoInfo (OTC:AUTO) is significantly undervalued. At a price of $1.06, you risk a loss of about $0.01 (with a $1.05 deal on the table) and could be rewarded with $1.00 of gain from here (to the low end of the range of its fundamental value).

    Share price based on actual financial performance and competitive multiples

    Based on a 12% yield on market capitalization and a revenue growth rate of 10 to 15% declining linearly to 2.5% in 5 years. The value is based on actual financial performance over the last 8 quarters.

    Share price of $2.47 to $5.39

    Share price based on PE of competitors of like revenue growth PE = 18 to 27

    Share price of $2.10 to $3.15

    Share price based on multiple of book value of 5 to 6

    Share price of $4.10 to $4.92

    Share price based on multiple of 20x free cash flow

    Share price is $5.15

    Disclosure: I am long OTC:AUTO.

    Stocks: AUTO
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Comments (38)
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  • johnbarleycorn
    , contributor
    Comments (118) | Send Message
     
    I see Comvex originally offered $1.26.
    16 Mar 2013, 06:16 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » That they did. $1.26 would have been an extremely good price for AUTO. However, much of the consideration being paid for AUTO is denominated in jobs, insurance, salaries, and equity for management.
    16 Mar 2013, 06:19 PM Reply Like
  • aretailguy
    , contributor
    Comments (1017) | Send Message
     
    Chris, it appears that two separate law firms have filed suit against AUTO BOD on behalf of shareholders. Due to the severity of the underpayment, what are the odds of a favorable outcome (for shareholders) and what kind of timeframe would one normally expect in these circumstances? By my calculations there are about .47 assets/share. Counting the business value at .58/share with an ROI of over 11% there should not be much of a question of valuation. The real questions are the legal outcome probabilities.
    16 Mar 2013, 06:45 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » I think that the chance of a favorable outcome is just under 50%.
    16 Mar 2013, 10:57 PM Reply Like
  • Chris Zocca
    , contributor
    Comments (250) | Send Message
     
    Chris,
    Since the deal with Comvest @ $1.05 per share was announced a couple of weeks ago, I have counted at least nine different law firms that announced investigations into possible breaches of fiduciary duty by the BOD of AutoInfo in connection with the deal. That seems like a lot of lawyers for a company with a market cap slightly north of 36M. Do you think that the high level of legal activity surrounding the announcement of this deal might be indicative of a good possibility of a higher bid for AUTO emerging at some point in the future?
    16 Mar 2013, 06:50 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » I don't know. Fundamentally, it is worth closer to $2.
    16 Mar 2013, 10:57 PM Reply Like
  • Sal Marvasti
    , contributor
    Comments (1364) | Send Message
     
    The question I have may be stupid, but I would like to know before the takeover offer why was it selling so cheaply ????
    Why the market saw no upside until the takeover?
    16 Mar 2013, 08:38 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Fair question. I don't know.
    16 Mar 2013, 10:58 PM Reply Like
  • joeg1969
    , contributor
    Comments (344) | Send Message
     
    Im in!
    16 Mar 2013, 11:25 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » I hope that it works out well.
    17 Mar 2013, 02:28 AM Reply Like
  • SafisKusai
    , contributor
    Comments (233) | Send Message
     
    is this the sort of investment that you would go activist with? if you could pick up enough shares that is.
    17 Mar 2013, 01:26 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Well, regardless of whether or not you choose to take an active role, you will have the ability to vote on the current transaction. Also, you can exercise appraisal rights.
    17 Mar 2013, 02:30 AM Reply Like
  • SafisKusai
    , contributor
    Comments (233) | Send Message
     
    true, i suppose i just have this view that once someone goes activist they are a louder voice than the smaller holder's that can help rally people to make the more rational decision and show management that their shareholders aren't the fools they think they are
    17 Mar 2013, 04:53 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » I do love making rational decisions and showing management that their shareholders aren't fools that they think they are.

     

    I for one think that the reasonably likely downside is $1.05 and upside is $2 and probability of the downside is around 50%. So, this is a very high expected value which the market is currently mispricing. It is very safe. The ratio of upside to downside is extreme.

     

    As for a scenario in which such a value does not encourage someone to actively speak up for both themselves and, in the process, smaller holders? I would be surprised.
    17 Mar 2013, 07:44 AM Reply Like
  • SafisKusai
    , contributor
    Comments (233) | Send Message
     
    i think some investors are entirely too complacent and uneducated to "speak up" even when its best for them. also for instance sometimes its broker issues too, i had to personally ask for my green proxy vote in the tpg/sandridge vote from etrade because they never gave it to me in the first place.
    17 Mar 2013, 02:56 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Interesting. When I own a fraction of a company, it is just like owning the fraction of a plane or real estate, etc. It is worth acting like the owners that we are.
    17 Mar 2013, 08:12 PM Reply Like
  • SafisKusai
    , contributor
    Comments (233) | Send Message
     
    you could probably best see the concept with voting in government elections in america. compare the eligible voting population to those that actual voter turnout and it's appalling (especially during the non-presidential elections that matter most). And those that do vote are entirely influenced by larger groups (the PACs, the unions, the media) to lead them to a decision that may not be in their best interest. Usually people say they don't vote because their single vote won't make a difference.

     

    You can take this same concept with buying stock. The uneducated in the ways of the market might hear a hot tip from a friend or family member and think they might make a fortune but the few shares they pick up might never had any significant meaning to a shareholder vote. At least that's what they think. I don't think most retail investors truly get the equity concept... you own part of the company. A large part of this is the poor financial literacy/education in the country.
    17 Mar 2013, 08:39 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (818) | Send Message
     
    Hey Chris,

     

    I just went through the quarterly filings of AUTO and the offer price is significantly undervaluing the company. What kind of scenario do you see with regards to a higher takeover price? Do you feel like Comvest will offer a higher deal even though the two parties agreed?

     

    Thanks in advance,

     

    Wilson
    17 Mar 2013, 04:34 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » If an offer price is significantly undervaluing the company, that is something that one can react to in a number of ways including 1.) The vote and 2.) Appraisal rights. Simply adjust the discount rate that the financial advisors manipulated in order to back into $1.05 to a more sensible rate of your choice and the price quickly becomes closer to $2.00.

     

    Comvest will do whatever makes sense for Comvest. They will be able to flip this company for a 2x or 3x profit within a year or two at the current price so they have a lot of flexibility. Also, any number of strategic deals could easily be put together. For two examples, a warehousing company or a larger agent-based 3PL trucking company could pay $2 or so simply based on cost savings and make the deal instantly accretive.
    17 Mar 2013, 07:36 AM Reply Like
  • gsterling
    , contributor
    Comments (552) | Send Message
     
    Is anything known about the insiders and their involvement with Comvest? I'm guessing if they don't object they may stand to benefit in other ways.
    17 Mar 2013, 12:21 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » The insiders are the buyers. They are investing alongside Comvest. They get: equity, profits, insurance, jobs, salaries, tax-efficiency, and more. This is a terrific deal for management. If you looked at the cost per share of this deal to the buyers, it is much higher than the benefit to shareholders. The earlier $1.30 bid was closer to the cost per share. However, once management got paid, that cost came right out of the consideration paid to other holders.
    17 Mar 2013, 02:07 PM Reply Like
  • gsterling
    , contributor
    Comments (552) | Send Message
     
    Are the other major shareholders insiders as well? According to the article below major shareholders include Kinderhook Partners, James T Martin (Private Investor), Baker Street Capital, and Khrom Investments. Are these entities related to Comvest and/or AUTO executives?

     

    http://seekingalpha.co...
    18 Mar 2013, 07:40 AM Reply Like
  • Ghosts of Kariela
    , contributor
    Comments (152) | Send Message
     
    I'm a bit concerned by how much they depend on manufacturing. AUTO certainly looks cheap on paper, but I'm not entirely sure whether their industry related risk is significant or even quantifiable. Essentially, I don't know enough about the industry to make a large buy. However, I might end up buying a small amount though.
    17 Mar 2013, 08:32 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » These are legitimate concerns. I base my confidence in the margin of safety. In bad years, they can grow at about 10% and in good years, they can grow much more.
    17 Mar 2013, 08:37 PM Reply Like
  • Todd Johnson
    , contributor
    Comments (6952) | Send Message
     
    My feedback has been removed. Chris, you are spot on. TJ 03.16.13
    17 Mar 2013, 09:21 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Thank you.

     

    I think that the chance of an adverse outcome here is about 50%, but this is sincerely representative of my best work. In fact, I've been a bit manic working on this one close to full time (as in 24-hour days) for several days in a row to prepare my thoughts and next steps. Lots could go wrong with the conclusion, but we're pretty happy with our process so far.
    17 Mar 2013, 09:25 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (818) | Send Message
     
    Chris,

     

    Now that I conducted further due diligence. I am in the same boat as you are. I will be taking a position and voting down the deal.

     

    Thanks again for this brilliant idea,

     

    Wilson

     

    P.S. it's just unfortunate because I can probably only buy 100,000 shares given that I'm invested in DTV, BBRY, SD and STRZA.
    17 Mar 2013, 09:47 PM Reply Like
  • EJT
    , contributor
    Comments (32) | Send Message
     
    Will a proxy be circulated on this deal in March?
    19 Mar 2013, 11:05 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Those are worthy too. SD will probably be especially worthwhile I think & hope.
    19 Mar 2013, 11:09 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » The preliminary proxy on DELL will be out in March and the preliminary proxy on AUTO is already out.
    19 Mar 2013, 11:10 AM Reply Like
  • sheldond
    , contributor
    Comments (1024) | Send Message
     
    Chris,

     

    Thanks for sharing. Interested to see how This proceeds in the courts.

     

    DCSIII
    18 Mar 2013, 10:39 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » You're welcome. Hopefully lucrative; certainly interesting...
    18 Mar 2013, 05:50 PM Reply Like
  • DC Value Guy
    , contributor
    Comments (4) | Send Message
     
    Chris-

     

    Thanks for this interesting post. I've owned AUTO for about a year. I don't like the price non-management shareholders are getting in this deal. My question for you is around the concept of "seeking appraisal rights" -- what has been your experience (if any) with such a demand in cases like AUTO (insider take-private of small-caps at highly favorable valuations)? I am seeking appraisal rights in another situation but I have no idea what to expect (timeline, incremantal consideration received if any, etc.). Thanks in advance.

     

    DC Value
    19 Mar 2013, 04:39 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Two years or so, quite a bit of hassle, expense, and an outcome that is similar to an audit of the fairness opinion. In the case of AUTO, a typical appraisal process would result in a price of around $2.00-2.50, which is where one get to using the same premises as used in the fairness opinion without the silly distortions, such as the absurd discount rate. They also went out of their way to use a list of comps that comingled irrelevant data points in order to prove the point that they are trying to prove. These bankers would do anything, absolutely anything in the world, for a few dollars.
    19 Mar 2013, 07:46 AM Reply Like
  • EJT
    , contributor
    Comments (32) | Send Message
     
    Have not dug into the legal process, will my broker of record be sending a proxy to vote on this deal soon?
    19 Mar 2013, 10:19 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » Your broker will probably send you the definitive proxies when they are published. You can go to the SEC website or others that distribute EDGAR filings to read the preliminary version, which will have some changes but will be pretty similar.
    19 Mar 2013, 11:11 AM Reply Like
  • EJT
    , contributor
    Comments (32) | Send Message
     
    Thank you, your participation on Seeking Alpha has been fantastic- I could spend all day reading your analysis, ideas. Best ideas with critical thinking I've seen in many years of investing!
    19 Mar 2013, 12:23 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
     
    Author’s reply » You're welcome. The research is fun and every once in a while comes up with something.
    19 Mar 2013, 12:27 PM Reply Like
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